5.3.6.1 Achievement of Economic Potential

High transaction costs and inadequate property rights
Substantial cost reductions may go unrealized when the transaction costs are
high. Attempts to reduce transaction costs and to clarify property rights may
yield substantial long-term gains. Uncertain property rights, especially as
far as intellectual property rights are concerned, act to increase discount
rates. Procurement routines which include energy consumption as a criterion,
and accounting procedures which are adapted to the polluter-pays principle may
need to be adopted to provide appropriate incentives for production units to
reduce energy consumption. Intellectual property rights encourage foreign investment,
but could also have a negative impact on the adaptation of existing technologies
to local conditions (Blackman, 1999).

Demonstration projects, advertising campaigns, testing and certification of
new technologies, subsidies to technological consulting services, and science
parks are ways for governments to enhance the flow of information on new technologies.
This information is bound to be imperfect, because firms have no incentive to
supply information about new technologies to late adopters, and technology suppliers
are more concerned about market share than about technology diffusion (Blackman,
1999).

Misplaced Incentives
In some situations, the incentives of the agent charged with purchasing a product
or service are not aligned with those of the persons who would benefit from
higher efficiency. An example is in rental housing where the tenant is responsible
for the energy bill, so the landlord has little or no incentive to undertake
energy efficiency improvements or acquire more efficient equipment. Other examples
of misplaced incentives are present in contracts which pay fees to architects
and technical advisors that are measured as a percentage of total project investment,
and give rise to over-sizing and gold-plating without sufficient
attention to the (energy) performance of the investments.

Inefficient Labour Markets
These may prevent the efficient movement of skilled workers among sectors. This
may slow technology diffusion and therefore growth (Aghion and Howitt, 1998).

Co-ordination Problems between Technology-producing Sectors
Some technologies, dubbed general purpose technologies (or GPTs,
Bresnahan and Trajtenberg, 1995), are characterized by much initial scope for
improvement, many varied uses, applicability across many diverse sectors, and
strong complementarities among the uses in different sectors (Helpman, 1998).
Development and diffusion of these technologies requires co-ordination between
the sector or sectors producing the GPT and the application sectors, because
rapid development of the GPT is dependent on improvements in the technologies
in the application sectors, and vice versa.

Policy Uncertainty
Climate change uncertainties inhibit desirable investment in new technologies
and long-term capital goods. The resulting uncertainty about energy prices,
especially in the short-term, seems to be an important barrier. Therefore, policy
uncertainty should not add to the incentive of holding off relatively irreversible
investments. Policy stability is a virtue and institutions are patterns of routinized
behaviour that stabilize perceptions, interpretations, and justifications (Giddens,
1984; ORiordan et al., 1998; Schmalensee, 1998). Lack of credibility of
technology forcing policy is a form of policy uncertainty as is illustrated
by the example of the 1970 US automobile emissions standards (Box
5.2) (Rip and Kemp, 1998). Another form of policy uncertainty results from
a crisis by crisis government management style, or from the fact that issues
are sometimes championed by individuals and die off when these individuals leave
the political scene.

Box 5.2. United States Automobile Emission Standards

Federal controls on US automotive air pollution (carbon monoxide, oxides
of hydrogen, and hydrocarbons), inspired by a technology forcing philosophy,
were first applied to 1968 model cars in the US. In the following years,
the standards were gradually made more stringent (White, 1982). The 1970
Clean Air Act imposed stringent nationally uniform emission limitations
on new motor vehicles requiring 90% reductions over uncontrolled emissions
by 1975-1976 with fines of up to US$10,000 per car and limited provision
for deadline extensions. The ambitious standards established proved to
be difficult to achieve. By 1976, it became clear that many air quality
areas were not going to meet the deadline for implementing the ambient
standards (Ashford et al., 1985). The deadlines for achieving 90% reduction
were repeatedly waived or statutorily postponed. The $10,000 fine was
not credible (Stewart, 1981). The Clean Air Act was amended in 1977, and
moved away from technology forcing by introducing market incentives such
as innovation waivers (Ashford et al., 1985). Empirical results show,
however, with very little ambiguity, significantly lower emissions from
vehicles for 1968 and after, especially for the years in which emissions
were tightened (White, 1982). Therefore, compliance was achieved despite
the fact that industry argued, or that compliance with the regulation
was doubtful or thought to be impossible. Rapid diffusion of add-on catalysts
and minor modifications to the standard combustion engine were achieved
but basic changes in engine technologies did not materialize. Uncertainty
about whether a deadline or a fine will be enforced gives the signal to
industry that a technology developed may ultimately not be needed, and
that adopting low-risk existing technologies i.e., technology diffusion
is the way to go (Stewart, 1981; Ashford et al., 1985).